Next Financial Group Inc. was hit last month with its third significant regulatory action in three years when Finra socked it with a $400,000 fine and $102,000 in restitution to clients.
The action, reported on
Financial Industry Regulatory Authority Inc.'s BrokerCheck record for Next on Nov. 10, comes after Finra concluded that the company “did not have a reasonable system for reviewing the transactions of its registered representatives for excessive trading.”
Finra noted that one representative was found to be churning client accounts and that Next's oversight system, which relied on compliance personnel and branch managers, fell far short of its responsibility to detect and halt the activity.
“Given the volume of trading [that] certain principals reviewed, and in certain cases, the large number of representatives the principal was responsible for, it was not reasonable to expect principals to be able to track excessive trading on a weekly sales blotter, let alone through monthly account statements or mutual fund sales charge reports,” Finra said.
“Due to the lack of a reasonable supervisory system, the firm failed to detect excessive trading by a registered representative in five accounts, resulting in about $102,376 in unnecessary sales charges.”
Meanwhile, a former Next rep faces three arbitration claims that center on excessive trading and churning.
The rep, Clyde Thornburg, was affiliated with Next from August 2007 to December 2009, when he joined Woodbury Financial Services Inc. Two of the customer complaints stem from his time at Next, and one from his tenure at Woodbury in Sarasota, Fla.
In one complaint about his conduct at Next, a client alleged that Mr. Thornburg from September 2007 to February 2009 “purposely traded securities excessively to generate commission.” The damages sought in that claim are $190,000.
In the complaint involving Woodbury, the client's attorney charged that the rep “churned and engaged in unauthorized trading” in three brokerage accounts between January and June 2010,” Mr. Thornburg's Finra record stated.
WELLS NOTICE
In late October, weeks before Finra fined Next Financial, the regulator tagged Mr. Thornburg with a Wells notice.
Finra's Wells notice, which is a preliminary recommendation for disciplinary action, stems from Mr. Thornburg's alleged actions between February 2008 and July 2009, including “potential violations related to mutual fund and unit investment
trust recommendations made in customer accounts.”
An investigation is pending, according to the Finra records.
Woodbury fired Mr. Thornburg in June “because he failed to follow the firm's direction with respect to [unit investment
trust] trading activity,” according to the Finra record.
In his response to Woodbury's dismissal, his Finra record stated: “Woodbury believes [unit investment trusts] are buy-and-hold vehicles. I have always been told they were not to be short-traded, but as they are two-year products, it may be in a client's best interest to change from investment if necessary.”
A spokesman for Woodbury declined to comment.
After leaving Woodbury, Mr. Thornburg joined International Financial Solutions Inc., but is no longer registered there, according to his Finra record. Calls to his office last Thursday and Friday weren't answered.
According to Finra, Next also failed to identify or follow up on other transactions that suggested excessive trading by 13 other reps in 39 additional client accounts.
Not only did the firm fail to detect such trades — when they were spotted, nothing was done, according to Finra.
When Next's systems flagged large trades of a single stock three times during a single week in June 2008, the firm took no action, according to Finra.
Next has neither admitted to nor denied the findings.
Barry Knight, the firm's president and chief executive, didn't return phone calls last week seeking comment.
Next has been one of the fastest-growing independent-contractor broker-dealers over the past 10 years.
Recently, however, it settled complaints from regulators at the Securities and Exchange Commission and Finra involving failure to protect private client information and lack of supervision of managers of its branches, known as offices of supervisory jurisdiction.
The most recent survey of independent broker-dealers by
InvestmentNews showed that Next had 1,027 reps and gross revenue of $123.6 million.
The company has been sanctioned and fined twice by regulators in the recent past.
Last year, Finra fined the company $1 million for failing to have a reasonable system to review the transactions of its OSJ branch managers. The branch managers, not compliance principals, reviewed the suitability of their own transactions.
“The firm's written procedures failed to explain how the firm would supervise OSJ manager transactions,” Finra said.
An OSJ branch manager churned customers' accounts, with clients losing $565,000, according to Finra.
Next neither admitted to nor denied those findings.
In 2007, the SEC alleged that as reps left the firm, Next “violated Regulation S-P by disclosing non-public personal information about its customers to non-affiliated third parties without allowing the customer the opportunity to opt out of such disclosure by allowing registered representatives to take customer non-public personal information with them when leaving Next's employment.”
Likewise, when reps joined the firm, Next violated Regulation S-P by carrying private information such as
Social Security and passport numbers to Next without proper notice to the clients, according to Finra.
The firm, which was fined $125,000, neither admitted to nor denied those findings.
E-mail Bruce Kelly at [email protected].
